Impact of Interest Rates on Trump's Second Term: A Key Market Driver

Introduction:

President Donald Trump's success in office has been closely tied to the performance of the stock market. However, in his second term, interest rates are likely to play a significant role in shaping market performance, potentially limiting Trump's ability to influence the economy.

Rising Treasury Yields:

Since Trump's election, the 10-year Treasury yield has risen significantly, reflecting market expectations of fewer interest rate cuts by the Federal Reserve (Fed). These rate increases have historically coincided with stock market declines.

Correlation Between Rates and Stocks:

Morgan Stanley's Mike Wilson has observed a negative correlation between equity returns and bond yields. As yields rise, stock prices tend to fall. This correlation has emerged since mid-2024.

Trump's Difficulty in Influencing Rates:

Unlike other presidential policies, Trump has limited ability to influence interest rates directly. In fact, his public statements and tariff plans have often led to higher yields.

Fed's Inflation Concerns:

The Fed is concerned that Trump's policies, particularly tariffs, could exacerbate inflationary pressures. Inflation remains above the Fed's 2% target, potentially limiting the central bank's ability to cut rates further.

Independent Fed:

Despite being an independent body, the Fed has made it clear that it will not take directives from Trump regarding rate decisions.

Market Speculation:

The rise in rates is viewed as a systemic problem for equities. Markets continue to speculate on the Fed's future actions, which will ultimately determine the trajectory of bond yields and stock prices.

Softer Economic Data Needed:

Piper Sandler's Michael Kantrowitz believes that softer economic data could ease rate pressures and support stock growth. However, a strong December employment report has raised expectations of a less accommodating monetary policy.

Conclusion:

Interest rates are expected to be a key driver of the stock market in Trump's second term. While Trump has limited influence over the Fed, rising yields may constrain his ability to boost the market and influence the economy as he has in the past.